Banking Wars.

Commercial banks are putting the squeeze on their investment cousins

ABOUT a year ago Bloomberg News reported a small but telling event in financial America. Ford Motor Co. had asked its favorite investment bankers, Goldman, Sachs & Co., to extend $250 million in short-term credit in exchange for underwriting Ford's more lucrative bond deals.

I don't know if this was the first time a big company had demanded commercial banking services from its investment bankers, but it might well have been. Only a year before, Congress had eliminated the laws that prevented commercial banks from underwriting securities. The people who did the lucrative investment banking work were, in theory, exposed to new competition.

This wasn't just more competition from fellow investment bankers. It was competition from an entirely different species. And it was unclear at first what that meant.

No longer. What appeared at first to be an unreasonable demand from Ford is rapidly becoming the price of doing investment banking business. Two months after Goldman turned up its nose at Ford's request, it acceded to similar demands from Wal-Mart Stores Inc. -- on the condition that Wal-Mart didn't disclose the terms of the deal (thus enabling Goldman Sachs to pretend to its other customers that it hadn't done what it did).

Wal-Mart was afar bigger Goldman customer than Ford. Wal-Mart also had on its board a former chairman of Goldman Sachs, Stephen Friedman, who must have known that his old firm, if pressed, would succumb to the new unpleasant reality.

Cost of doing business

Since then the investment banking resistance has collapsed. In the past year, investment bankers have routinely offered the draining and unprofitable (at least to them) credit lines to their corporate customers. When they have been slow to do so, they have been shoved aside by commercial bankers who are not.

Bank of America has become the fifth leading underwriter of junk bonds -- ahead of Merrill Lynch & Co. and Lehman Brothers -- and the financial news is peppered with other commercial bankers stealing business by offering cheap short-term credit in the bargain. The commercial bankers have gained investment banking market share largely because they have, in effect, offered the same service for a lower price.

There are technical accounting reasons why they are able to do this: Unlike investment banks, commercial banks aren't required to carry the loans on their books at market value. If a borrower's business goes south, the investment bank must mark down the loan, while the commercial bank can continue to carry it at face value. Goldman Sachs has rightly complained about this discrepancy to the Financial Accounting Standards Board.

But the competitive advantage of the commercial bankers runs deeper than their lucky accounting standards. The biggest advantage commercial bankers have over investment bankers is that they aren't as greedy. They were born with lower expectations. What looks like an unthinkably rotten deal to Goldman Sachs looks like the most exciting piece of business in the history of the known universe to Bank of America.

"So what?" you say. The corporate bond business could vanish and Goldman Sachs would still be Goldman Sachs. And, I agree, any story that leads with the phrase "short-term credit" hardly excites deep passions. By itself Bank of America's insistence on extending credit lines only to companies that give it investment banking business is a tiny financial event. But it nevertheless suggests a much bigger shift taking place in the money culture: the struggle for survival between two species.

What if they breed?

At more than 10 paces, the commercial banker and the investment banker are indistinguishable: Suits. Or, at any rate, people who wrestle each morning with the decision of whether to wear a suit.

But people who look essentially the same at a distance couldn't be more different up close. The commercial banker is a bundle of fears designed mainly to survive for just long enough to pass on his genes. The investment banker is a bundle of greed designed to maximize the amount of red meat he hauls back to his cave before he dies a bloody death.

The herbivore and the carnivore are ill-suited for intermarriage and even less suited for interbreeding. They will not blend. When thrown into the same habitat, one or the other must triumph.

The future of this struggle is now a bit clearer: The commercial bankers' price cutting tendencies will undermine large chunks of the investment banking business. Stock investors have already begun to pick up on it -- sending up the shares of the more aggressive commercial banks (Bank of America), at the same time they send down the shares of the investment banks that stand to lose the most from price competition (Goldman, Morgan Stanley).

No doubt the investment bankers still believe that no commercial banker with his decent family values and his nine-to-five attitudes and his pathetically low financial expectations can pose a threat to an investment banker. Even the commercial bankers seem to believe that the more rarefied -- and profitable -- investment banking services such as advice on mergers and acquisitions can't be bought.

Not long ago a spokesman for Bank of America was quoted saying that "you don't win an M&A engagement by providing capital." But of course you can.

Michael Lewis is the author of "Liar's Poker" and "The New New Thing." His new book, "Next," will be published next month.